Mergers: cautionary tales
Mergers and Acquisitions (M&As) are happy hunting grounds for lawyers
With the increasing numbers of distressed companies due to Covid-19 and the economic recession, the opportunities are increasing by the day. Add to this the weakness of the Rand and overseas investors, awash with cash, must be watching with heightened interest. Perhaps the main hurdle to inward investment is the ANC and regulatory issues which can be challenging. But while, as Michael Katz argued (“trade Carefully”, FM, July2), legal and financial examinations are always necessary, the metrics have changed.
Twenty years ago, an investor would focus on NAV and the 80% of the value that is tangible. Today the roles are reversed: intangible assets, like patents and brands sometimes make up 80% of a company’s value.
This is likely to accelerate. We live in a digital world turbocharged by Covid-19, a world of brands and reputation. As Microsoft CEO Satya Nadella put it, he’s seen more transformation in three months than the previous three years.
But this raises another challenge: figuring out if the assets are real, valued realistically and not in dispute. Nowadays, all major brands have their own profit and loss accounting. From this you can see that another option rather than a full-blown M&A is to buy or sell brands, provided they are separable from their owner. As companies review their strategies, they’ll ask which brands remain relevant, which are past their sell-by date and are there brands out there you would love to own that may be available?
Take the explosion in video conferencing options as we all work remotely. For many Skype was the main option but now we have quite a few more, including options from Microsoft and Google. A newcomer that has taken the market by storm is Zoom. Canny investors piled into Zoom Technologies in April, pushing its share price up threefold in five weeks. Only, it was the wrong Zoom: over the same period in April, Zoom Communications had risen a modest 30% until the US securities & exchange commission suspended trading in Zoom Technologies. Since then the right Zoom has soared on the market.
Egg on its face
One of the most publicised oversights when it comes to due diligence of brands happened when Rolls-Royce sold its car division. The original company was founded in 1904 as an engineering group, though today it is best known for supplying aero engines to Boeing and Airbus. In the early 1970’s the group was close to liquidation and the UK government bailed it out. In 1973, the automotive division became a standalone company, Rolls-Royce Motorcars Limited, with its assets Rolls-Royce and Bentley cars. In 1998 Volkswagen won a bidding war with BMW to buy the car company for $790m. But unbeknown to Volkswagen, it had bought the plant, designs, a unionized work force and a car - but not the trademark Rolls Royce, which remained with the parent company. That left it with spätzle on its face. So Volkswagen could build a car to all intents and purposes a Rolls Royce but no call it a Rolls-Royce. It though it had bought a car but ended up with a dog. But it didn’t end there, as BMW then bought the rights to the Rolls Royce trademark for $66m. The result today is that we have a Bentley produced by Volkswagen and a Rolls-Royce produced by BMW.
Welcome to the new world of brands where Volvo is owned by the Chinese, Land Rover by the Indians and Mini by the Germans. It illustrates how, in most deals, the value of the intellectual property remains an afterthought. The world’s most valuable brand is Amazon, with the brand itself making up over 24% of total business value. Look at the S&P 500, and you’ll see that more than 77% of the value of these companies, in total, is made up of intangible assets. International investors are cognisant of these facts. It means that, for this new world, due diligence has to be far more rigorous than it used to be.
